COVID-19 impact on landlords

March 24, 2020 | News

Assuming the lease is based on the market practice ROZ terms and conditions, the legal playing field between tenant and landlord is roughly as follows.

Probably no reliance on defect regulation

It does not seem possible to file for a lowering of the rent on the basis of a defect in the rented property. invoke the tenancy law's defects regulation. Firstly, it is questionable whether the coronavirus crisis (and its consequences) is a defect. In addition, rent reduction is contractually generally only possible if the landlord is attributable to the landlord. That is not the case here.

Possible appeal on unforeseen circumstances

Furthermore, article 6:258 Dutch Civil Law offers the possibility to invoke the doctrine of unforeseen circumstances. Firstly, there must be a circumstance that has not addressed, be it implicitly or tacitly, in the contract. The law does not require that the circumstance in question was unforeseeable. Furthermore, the impact of the unforeseen circumstance must be such that one party (in this case: the lessor), according to standards of reasonableness and fairness, could not demand the unaltered maintenance of the contract. Jurisprudence is very cautious in this respect. After all, loyalty to the given word remains the starting point. The judge will have to examine on a case by case basis whether the legal requirement is met. On the one hand, the tenant is hard hit by the impact of the measures announced by the government; on the other hand, the landlord's interests in rent payment are of course (also) evident. Finally, the unforeseen circumstance should not be for the account of the party invoking it. For example, case law indicates that sharply deteriorated market conditions as a result of the financial crisis in 2008/2009 are deemed to be a regular commercial risk. Here, too, the circumstances of the specific case play a role. For a sector that has already experienced the impact of previous epidemics (SARS, Ebola, Zika) in the past, the assessment is likely to be different than for a sector that has never experienced such an impact before.

In practice, recourse to unforeseen circumstances is only accepted in highly exceptional situations, but the coronavirus crisis is just such a situation. In this sense, an appeal to unforeseen circumstances might not be without merit. However, the tenant must realise that the burden of proof rests on him and that an appeal to unforeseen circumstances must be thoroughly substantiated. Moreover, the court will always take the circumstances of a specific case into account.

Should the court that an appeal to unforeseen circumstances is possible, then the judge can amend or dissolve the agreement. This can also be done with retroactive effect. What the court will be prepared to do also depends on the circumstances of the case. Keep in mind, however, that if the court adjusts the rental agreement as a result of the coronavirus crisis, he or she will want to divide the pain among the parties.

As long as the contract has not been modified by the judge, the tenant must "simply" pay the rent. Should the landlord claim payment under the bank guarantee, that such will afterwards - if the rental obligation is reduced by the judge - turn out to be unlawful.

Please note: we consider it to be relevant whether or not the tenant's business operations amount to the operation of the leased property. Think of shops, cinemas, restaurants and bars. These tenants are directly affected by the impact of the coronavirus. Tenants of offices will usually be indirectly affected, so that a succesfu invoking unforeseen circumstances seems less likely for those tenants.

Occupancy obligation

The tenant is usually contractually obliged to occupy and to actually use the rented property. If the tenant has ceased operation by order of the government, this is a case of force majeure and the landlord cannot require the tenant to resume operation. If the lessee has voluntarily decided to close down, it may - according to jurisprudence - be unacceptable under standards of reasonableness and fairness to oblige the lessee to resume the operation. The extent to which the exploitation is loss-making plays an important role in this. In that light, it does not seem likely - under the current circumstances - that a landlord can require its tenant to continue to use or reopen the rented property.

Further suggestions

Do an inventory of your security rights as landlord

Check whether the tenant has actually provided all the required securities. If a group guarantee has been provided, check whether it provides cover for damage caused by vacancy after bankruptcy. In the case of a guarantee from a foreign parent, check which law applies to the guarantee and which court is competent. Discuss whether a tenant can pay his rent through a claim of the landlord under the bank guarantee.

Keep an eye on things

Not all governments in Europe are taking the same measures. Moreover, the measures may be scaled up and - at some point - also be scaled down again. It will take time for many tenants to get their business up to the old level. It will take some tenants longer than others. The question is whether a landlord should and will continue to be lenient towards the laggards.

Convert the rent into a debt to be repaid at a later date

There may be good reasons for a landlord to agree that the tenant temporarily does not pay his rent. Consider not immediately cancelling the rent but converting it into a loan that will be repaid over the remaining rental period (if the crisis has abated), possibly making the repayment condition to a predetermined turnover for the tenant.

Talk to your financiers

Consider talking to financiers about adjustments to the loan repayment schedule and interest payments. In a potential procedure about rent reduction (due to unforeseen circumstances) you will be in a stronger position if you can substantiate what kind of leeway your financiers are willing to provide.

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